Update on HMRC’s plans for Making Tax Digital, Benefits of Private Pension Contributions and Class 2 NIC’s.
Have you heard of it? If not, that’s no surprise! It’s the accountancy equivalent of the snow leopard, confirmed to exist but rarely seen…
HMRC’s aim is for all taxpayers (or as they like to call them, customers) is to have a digital tax account and to make quarterly reports of their business income.
Sadly, HMRC have not yet been very clear on what information they want, who they want it from and when they are going to start asking for it.
They have confirmed that those businesses with “straightforward” tax affairs will have access to free software but, of course, have not as yet defined “straightforward” nor have they announced where or when the free software will be available.
More detail is expected after the EU Referendum, watch this space!
So, why are HMRC bringing in MTD? Well, the main driving force is to move businesses away from keeping paper records and to help HMRC do their jobs more effectively – digital records can’t be “lost” as easily as paper records.
HMRC have recognised that some people are “Digitally Excluded”, i.e. unable to access digital services and, one of the more strange suggestions is that those people will have the option of phoning in the information to HMRC every three months.
Have you ever tried to call HMRC and speak to a person? Good luck with that!
It is likely that HMRC will allow taxpayers agents to do the digital bit for them as it is the clients’ tax affairs that need to be digital rather than the clients themselves.
Benefits of Private Pension Contributions:
Changing tack, are you self-employed and don’t have a personal private pension?
If the answer is “yes” then you should seriously consider setting up a pension.
Making pension contributions is the best form of tax relief you can get without potentially attracting interest from HMRC – and with the recent changes to pension legislation it’s easier than ever to get your hands on the cash.
There is an annual limit of £40,000 on contributions and if you are a 40% taxpayer you effectively get 50% tax relief on the contributions.
As an example: you make a contribution of £80, the government tops it up to £100 then gives you a further 20% of tax relief on the grossed up amount of £100. The result is £40 of tax relief while only shelling out £80.
Changes to Payment of Class 2 NIC’s
HMRC changed the way they collect Class 2 NIC’s in the 2015/16 tax year but didn’t publicise it very well.
Class 2 NIC’s are payable by self-employed individuals whose self-employment profits exceed £5,965.
HMRC used to collect them by direct debit three months in arrears but now they are payable via self-assessment.
The tax payer, or better their agent, has to declare the Class2 NIC’s due on the self-assessment tax return and it will be payable by 31 January along with the normal tax and Class 4 NIC’s payment.
Unfortunately, HMRC’s systems have got confused and some taxpayers have received refunds they shouldn’t have.
Some tax returns have been submitted showing the Class 2 NIC liability and HMRC have then assumed its already been paid and refunded it.
If you get a refund it’s unlikely to be correct, don’t spend it! Ask your accountant for help!
Peter Allen FCA is Director of Macaroni Accounting based in Ashford